Can you self-insure for long-term care?

It might be within reach if you take these steps

The odds are worrisome. The typical 65-year-old can expect to live another two decades and has a 52 percent chance of needing some type of long-term care services and support at some point.

According to Melissa Favreault of the Urban Institute and Judith Dey of the U.S. Department of Health and Human Services, the average tab for long-term care is $138,000. Medicare covers hardly any of that cost. Medicaid does, but only for the impoverished.

Insurance is the classic financial planning solution for handling an uncertain risk that comes with a potentially large price tag, yet only about 10 million Americans have long-term care insurance, according to the American Association for Long-Term Care Insurance.

Put somewhat differently, 3.2 million boomers celebrated their 65th birthday last year while the insurance industry sold only 100,000 long-term care insurance policies. Problem is, the relatively small number of insurers that write long-term care policies have been hiking premium prices and reducing benefits. The effect: long-term care insurance policies are too expensive for many modest and middle-income households.

What if you’re among the millions of boomers who find the cost of long-term care insurance too steep for your household budget? Are there viable alternative strategies — ways of creating your own DIY insurance plan? Yes, but it takes planning and creativity.

Where to start? By starting

What can you do on your own to protect yourself against potential long-term care expenses? You can build a healthy margin of financial safety by focusing on savings and spending, especially by thinking through your living arrangements in your elder years. You’ll also want to carefully evaluate your support system of family and friends, as well as investigate the convenience and cost of long-term care services in your community.

“You need to proactively plan and not just wait,” says Robyn Stone, executive director of LeadingAge in Washington, D.C.

Savings help, of course. But if you’re in your 50s or 60s, don’t worry too much if you’re not flush with savings yet. You still might have another two to three decades to increase your savings; long-term care expenses usually don’t kick in until around age 80.

You can probably find at least some money to set aside with the kids out of college. Many boomers are earning an income well into the traditional retirement years, usually from part-time and contract work.

“Start thinking, ‘Can I put a little more money aside than I have been?’” says Howard Gleckman, senior fellow at the Urban Institute, and an authority on long-term care costs.

Hold on to home equity

The really rich lode of potential savings is on the spending side of the equation.

Years ago in an interview, Harry West, now chief executive officer of Frog Design, captured an insight about spending that belongs at the core of any DIY plan for financing long-term care: “When you talk to boomers, what you find is that freedom [from debt] is really, really important,” West said. “Freedom is a low overhead.”

Jonathan Guyton, a Certified Financial Planner and principal at Cornerstone Wealth Advisors in Edina, Minn., puts a practical spin on that view. “Look at your expenses,” he says. “This isn’t fancy stuff. But if you plan well, you’ll have more resources.”

The key decision is where to live. After all, the home is the single largest expenditure for most households. “At home” is also far and away the most popular answer to where we want to be as we age. In a recent AARP survey of 1,600 people 45 and older, 73 percent said they would like to stay in their current residence.

With that goal in mind, it pays to get rid of your mortgage if you can. Among the 65-plus population, 65 percent own their home free and clear.

You don’t want to tap your home equity, either, since it’s the foundation of the household safety net. “Maintain your home equity until you really need it,” says Gleckman.

That said, “aging in place” at home isn’t necessarily the best idea when fashioning a DIY long-term care plan. Remember, these expenses typically begin in your 80s, a time of life when social isolation is a growing concern, especially if mobility is limited.

“How much does aging in place become stuck in place?” asks Stone. “You don’t want to be lonely.”

Housing with community and cost-sharing built in

Stone recommends looking at co-housing, cooperative housing, home-sharing, shared residences and other communal living arrangements that reduce the overall cost of living and offer a built-in community. These living arrangements have largely operated on the society’s fringes, but they’re moving toward the mainstream.

“It’s not too late to plan to live in a community and to be more efficient with resources,” Stone says. For instance, home sharing involves renting out a room or part of the home to housemates, a way to bring companionship and additional income into the home.

Co-housing communities are another intriguing alternative. The community is planned by a group of people who choose to live together. It typically has large common spaces, such as a dining room, kitchen and garden and each household owns its own small place for independence and privacy. The financial advantage of co-housing lies in sharing some tasks and costs, such as grocery shopping and cooking meals. Everyone saves on his or her utility and maintenance costs.

A survey of 200 co-housing residents found a minimum monthly cost savings of $200 per household, according to the Fellowship for Intentional Community. At an annual compound rate of 2 percent, that adds up to nearly $27,000 in 10 years.

The co-housing model and similar communal arrangements are not the kind of long-term care you’d find in a nursing home. But they do offer a creative, low-cost way for neighbors to take care of neighbors.

When Charles Durrett, 60, an architect and co-author of Creating Cohousing: Building Sustainable Communities who lives in a co-housing community in Nevada City, Calif., recently fell and hurt his leg, he put out an email that he needed crutches and several were soon at his door. Residents would willingly bring a meal to his home if he needed it. In a number of communities, Durrett says, residents will share the expense of a professional caregiver.

“Co-housing is not only the best solution I know, it’s the most favorable from a quality-of-life point of view,” he says. “I’ve watched how seniors take care of each other.”

Living with less, happily

There are other ways to reduce living expenses and add to cash flow. It’s well documented that people spend less on stuff as they age, including clothes, jewelry and furniture.

People in their 60s and 70s do engage more with experiences, like travel, taking art lessons, volunteering in the community, mentoring younger workers and spending time with friends and family. In other words, embracing a frugal or thrifty lifestyle doesn’t signal a lower standard of living — far from it.

A letter writer to The New York Times several years ago put it nicely: “You can get by on a lot less when you’re retired, without really depriving yourself of anything important,” he said. “If I had known earlier how much ‘wealth’ derives from such simple pleasures, I would have retired much sooner.”

A 2014 survey by the mutual fund company T. Rowe Price bears this out. Among the boomers who’d retired in the previous five years, many reported that their households were living on less than the 70 to 80 percent of pre-retirement income that financial planners and retirement experts assumed they would need. Four out of 10 were living on 60 percent or less of their pre-retirement earnings.

Disaster, right? Hardly. Despite their reduced incomes, these retirees said they were satisfied with how they were doing and agreed they “don’t need to spend as much” as they did before.

Add a thin layer of long-term care insurance

You’ll also want to talk to your children, relatives and longtime friends about long-term care. How much can you realistically rely on them to help out if needed? In addition, you should research what kinds of services for long-term care are available in your community, basics like transportation but also opportunities to engage with people in the area. “Think about community in ways that take advantage of generations,” says Stone.

Now, I want to circle back to long-term care insurance. Let’s say you’ve embraced this basic DIY plan that involves working a bit longer, spending a bit less, saving a bit more and placing yourself into a community of mutual support. At this point, revisit the idea of purchasing long-term care insurance. Does it make sense to add a thin layer of coverage on top of your DIY plan?

You can lower the monthly premium by opting for a benefit that lasts for less than five years with a reduced daily benefit, for example. “You’re filling in a gap,” says Guyton.

Here’s the kicker: The elements that go into a DIY long-term care financing plan include everything that all of us, except for the wealthiest sliver of society, need to think about regardless of long-term care as we enter the second half of life.